02 845 ...

Inner city apartments still mixed bag for investors

Property investors are still facing challenges in the inner city apartment market as Sydney and Melbourne struggle to absorb an oversupply of stock and Brisbane suffers from an on-going deficiency of rental apartments.

Leading industry analyst and forecaster, BIS Shrapnel has completed its latest round of Inner City Apartment studies releasing reports which provide forecasts for the Sydney, Melbourne and Brisbane markets and up-to-date profiles of apartment occupiers in Sydney and Melbourne.

According to the BIS Shrapnel reports, price and rental growth in the inner Sydney apartment market will be constrained out to 2007/08 until the current oversupply is absorbed. Similarly, the Melbourne market is forecast to move through a period of recovery during the next two years, as excess rental stock is absorbed and the market moves back towards balance. Brisbane is a different story, with rental growth likely to begin to slow following five years of strong rises, as a record number of apartment projects are completed and provide relief to pent up rental demand.

“The story to watch over the next 12 months will be the rental market,” said BIS Shrapnel analyst and author of the apartment reports, Angie Zigomanis. “Melbourne rental growth has been stagnant, the Sydney vacancy rate has peaked, and the Brisbane market is experiencing a record number of completions. Investors will want to know when they will see evidence of improving rents in Sydney and Melbourne, and whether the tight rental market in Brisbane will be affected by the completion of the current round of apartment projects. While rental growth will return sooner, BIS Shrapnel does not foresee a substantial improvement in prices for Sydney and Melbourne until 2008/09, when the current low yields strengthen to become more attractive to investors. Although rents in the Brisbane market are expected to continue to show improvement over this financial year, BIS Shrapnel expects to see this drop off in 2007/08.”

While investors have been spooked by flat rents, low rental yields and little prospect for short-term capital gain, owner-occupiers have generally held up better than the investor market. Although demand from this segment is also below peak levels, owner-occupiers have responded to low unemployment, solid job prospects and strong wages growth, and have remained in the market in greater numbers.

Across all three cities, those apartment developments that rely on investor purchasers will continue to be impacted by weak investor sentiment, with more limited price growth, or even declines forecast to continue in the short term. Price prospects for apartments that are more conducive to the owner-occupier market will be more positive over the next five years, as price performance will be more connected to affordability rather than rental and investment returns. BIS Shrapnel expects to see the first stages of the subsequent upturn begin from 2007/08, although significant price growth is not expected to re-emerge until 2008/09.